ASIC private credit taskforce a welcome “necessity”: Datt Capital

The new taskforce set up by the Australian Securities and Investments Commission (ASIC) to address the lack of regulation in the private credit sector has been welcomed as a “necessity” by industry players.

Emanuel Datt, Chief Investment Officer of Datt Capital, said the taskforce is a “crucial” step forward to improve transparency of the sector for investors.

“Private credit is inherently an opaque asset class. This opacity, coupled with the illiquid nature of these investments, should be a focal point for investors to be aware of,” he said.

“When financial activity declines and asset price volatility rises, the demand for cash on hand intensifies. This is especially true for individual investors, who are generally more vulnerable to unexpected changes in circumstances than large institutional investors. The closed-end nature of many funds within this asset class can pose significant challenges for investors.

“This makes it difficult for investors to quickly sell their positions without facing substantial discounts or delays. Investors often encounter long investment horizons, with capital tied up for several years.

“This can lead to potential mismatches between the duration of investments and liquidity needs.”

Datt said that the obscure nature of private credit transactions can also cause inconsistencies in asset valuations and heighten difficulties experienced by investors to liquidate certain positions during periods of market volatility, increasing their overall risk exposure.

“During economic downturns, the narrow pool of buyers and sellers in the private credit space can worsen illiquidity, heightening the risk of significant losses,” he said.

“A portfolio’s risk level may change as the underlying value of these investments fluctuates. It’s crucial for investors to assess the liquidity profile of their broader portfolios rather than solely pursuing high yields, which may expose them to hidden risks.”